Hyperinflation vs. Inflation: Understand The Difference

The Market Oracle ^ | 9-1-2010 | Dr Jeff Lewis

[blam]

Hyperinflation vs. Inflation: Understand The Difference

Economics / HyperInflation
Sep 01, 2010 - 01:08 AM
By: Dr Jeff Lewis

Hyperinflation and inflation may share the same root, but they're two entirely different trees. While many assume that hyperinflation is just inflation's oversized cousin, there is much more to hyperinflation than most are aware.

The Basics of Inflation

Investors, traders, and average Joes alike should all have a firm understanding of inflation through rudimentary economics studies. Inflation is nothing more than an increase in the money supply that leads to changes in aggregated demand and ultimately higher prices for goods. Increases in prices during inflation are certain, and they tend to happen over a period of years or decades, rather than months or days.

Most commonly, inflation does not appear until eighteen months after monetary policy adjustments, as businesses rework prices to increase their market share of the aggregate demand for products.

The Basics of Hyperinflation

Hyperinflation shares some links with inflation in that the value of the currency is decreased, but at a much faster rate. In a hyperinflationary scenario, decreases in the value of money result from two conditions: perpetual increases in the total money supply and a decrease in confidence in the currency. The latter is the 800 pound gorilla in the room.

When a population loses faith in a currency, it does so quickly, like all bubbles do when they eventually pop. As we saw in the Weimar Republic, Reichsmarks fell in value by two-thirds in under a month, and by the next month, they had lost another two-thirds. In just two months, purchasing power plunged by more than 88%. You would have to be a fool to think the depreciation stopped there.

Businesses lost so much faith in the currency that they posted higher and higher prices as a way to turn customers away. Why sell today when the currency will be worthless tomorrow? All told, in just over six months in 1922, the Reichsmark plunged more than 99%. After two years, at the end of 1923, the Reichsmark was worth 1/15,000,000 of its 1922 value.

Hyperinflation Looms

For the Fed and the US economy, you really do reap what you sow. The seeds of hyperinflation have been planted wide and deep, and nothing short of a perfect storm of monetary policy and fiscal policy reductions can stem the tide. If history is any indication, the US dollar will follow in the footsteps of every fiat currency before it, losing piece by piece every year until finally all confidence is lost.

As to when hyperinflation begins, it is anyone's best guess. However, we can be sure that it will happen quickly and without warning. The best hedge still exists in gold and silver, with silver being the best alternative to paper money when the dollar eventually meets its demise. Its ease of use, anonymity, and the wide array of different denominations, including one ounce rounds, pre-1964 silver dimes, and large bars, make it a perfect crisis currency. Stock up because today's $19 per ounce price for physical silver will look like a going out of business sale when the dollar does “go out of business.”

[blam]

How Hyperinflation Will Happen

[Southack]

Utter nonsense...individual investors play no role whatsoever in Treasury pricing during Quantitative Easing.

Instead, the Fed is buying up all of the Treasury’s new debt.

This drives interest rates lower, making income harder to come by.

Deflation.

But don’t take my word for it. Simply look at what Japan has seen after doing the same thing every year since 1989.

Deflation.

We are copying Japan.

Japan has deflation and near 0% interest rates, the opposite of what the author of your article pretends should happen.

Reality is a beyotch.

[Secret Agent Man]

A better way to put it is inflation decreases the buying power of your money in increments. You may be able to survive it if your capital gains earn more interest than inflation takes away. But your dollar’s buying power, even though you may have more of them, is diminished. Not too many people go broke because of regular inflation over a one year period. However a number of years of relatively high inflation can really erode a person’s stored up wealth.

With hyperinflation, pretty much everyone becomes poor very quickly with the possible exception of the mega-rich, large millionaires and billionaires. Even their wealth is seriously eroded, but compared to what happens to everyone else, they still have a lot. It’s the fastest way to kill an economy as the price of goods soars 800-1000% or more quickly, usually more than once, but wages and investments cannot match the cost of goods, which become scarce, and the money becomes worthless.

Regular inflation eats away at your earnings in small chunks, hyperinflation takes it all at once, relatively speaking.

[Zakeet]

For what it is worth, current U.S. indicators (i.e. deficit as a percent of total government expenditures, government debt as a percent of GDP, etc) are worse than the same indicators were for the Weimar Republic in 1923, and in Argentina, Brazil and Bolivia in the mid-1980's.

Also for what it is worth, the 18-month "grace" period between the time the government ruins its currency and a hyperinflationary panic begins as cited in the article can be somewhat longer. For example, in the case of the Weimar Republic, the lag time was about 24 months.

Finally, our financial goose is cooked to the point where issues such as ObamaCare, fat civil service pensions, and runaway entitlements (Social Security, Medicare and Medicare) are moot. We cannot afford them, and they will therefore not happen - at least in any form recognizable to anyone reading this post.

[muawiyah]

blam, too much of that article is based on the idea that "asset managers" act on signals, and not on a very accurate view of what's going on in the world.

The second you start accounting for the Internet in these scenarios, the arguments fall apart.

One thing none of them face is the fact that home prices fell back to about 2004. That year was pretty good actually.

Other assets have done pretty much the same, and given subsequent natural gas discoveries the present higher price for oil is fairly well offset.

I was watching this TV show the other day about this company in the US that makes CUSTOM FITTED RUNNING SHOES.

They have a very automated computer driven line. About the only work people do there is to fit the base material on a last cut to the customer's specs.

The rest of the job is essentially automated.

They sell those tennies for less than their world competitors.

I can see this business expanding as other people decide they'd like custom tennies. They should last longer, be more comfortable, and reduce accidents while engaging in athletic events. If the price comes down more, these people could be putting China and India out of the shoe business. Millions of people would suddenly be unemployed.

That is called deflation but when it's caused by automation we end up with surplus workers with nothing to do.

Obviously we have to do something.

The Chicoms have put people on HALF DAYS. Everybody in a city is employed, but you share your job with another person. India has traditionally used a village based system that assigns people body servants according to their wealth. You make too much money you get a house full of servants ~

The whole point of these approaches to employment is to gainfully employ as many people as possible.

BTW, that shoe factory had what seemed to be just a few hundred people. The computer even addresses the boxes with the shoes in them! I presume it runs a box stacking machine too that's already sorted to UPS standards.

Here's the way one of my aunt's (8 of 'em) husbands (only 1) worked it. He had heart trouble. However, the best way to deal with it required regular exercise ~ deep knee squats were good because they forced the blood back up his system to the heart.

So, he went to the grocery store where he'd worked for years until he retired and asked them if he could just load and unload stuff ~ and he signed on at something like minimum wage so he could put in half days, and be insured on the site, and all that sort of thing.

They were happy to have him ~ because he knew the business.

Well, he did that for several years and then one weekend he died suddenly of PNEUMONIA.

You can't plan for everything, but in a tight market for jobs he figured out how to get one and did so. He bid down the price of labor in that town from about $14 an hour to $5.75, or whatever minimum wage is. He'd done it for free, but insurance companies cover employees on the docks ~ not the customers. This is another way deflation works ~ doesn't even matter if there's more money out there ~ if the price of labor collapses, you can get deflation. That's rarely discussed because the economists want you to believe companies never lower prices.

[blam]

"Finally, our financial goose is cooked to the point where issues such as ObamaCare, fat civil service pensions, and runaway entitlements (Social Security, Medicare and Medicare) are moot. We cannot afford them, and they will therefore not happen - at least in any form recognizable to anyone reading this post. "

So...what will happen?
Some people will die without those.

[April Lexington]

I’m not so sure this novelist and film maker is correct. Reminds me of the old Wall Street tale of Joe Kennedy listening to the shoe shine guy and then selling his holdings weeks before the Crash of 1929. The day a novelist and film maker tells me how to invest is the day I SELL!

[tutstar]

bump

[Prince Caspian]

Finally, our financial goose is cooked to the point where issues such as ObamaCare, fat civil service pensions, and runaway entitlements (Social Security, Medicare and Medicare) are moot. We cannot afford them, and they will therefore not happen - at least in any form recognizable to anyone reading this post.

I agree. I've gotten past feeling outrage over the excessive spending and debt. It's all moot at this point. It's just the lull before the storm that sweeps everything off the table. Worrying about it is like someone arguing with a fellow passenger about cheating during a poker game on the Titanic. It's meaningless. Buckle up.

[blam]

"I’m not so sure this novelist and film maker is correct."

LOL. I thought exactly the same thing when I emailed the article to my friend.

He and I both agreed though that it was the most easily understood article about inflation/hyperinflation that either of us had ever read.

Hyperinflation is a loss of confidence in the money, no-one wants it.

Inflation is to much money chasing to few goods.

Before we read that article, both of us just thought hyperinflation was intense inflation.

[Zakeet]

So...what will happen? ... Some people will die without those.

That's exactly what has happened in other countries that have undergone hyperinflation.

People have typically faced mass starvation (e.g. Weimar Republic and Zimbabwe). Law and order usually breaks down. Civil conflicts such as riots almost always happen, along with massive governmental intervention (e.g. wage and price controls, asset confiscation and redistribution, etc.) Complete governmental change is common. As always, the poor, elderly and disabled suffer the most.

Hyperinflation is an ugly event that should be avoided at all cost.

[blam]

Warning Global Fiat Currency Financial System Collapse By Early 2011

[Moonman62]

We are copying Japan.

Yes we are. I wonder if they have gold bugs over there always jumping up and down wanting attention.

[Zakeet]

How Hyperinflation Will Happen:

America Adds $210 Billion In Gross Debt In August, Rolls $620 Billion In Bills And Notes

As per the August 31 DTS statement, the US ended the month with a new all time record of $13.45 trillion in debt, and increase of $210 billion from the beginning of the month (or $225 billion in public debt, net of intragovernmental holdings). With just 30 days left in fiscal year 2010, the US has added $1.54 trillion in the eleven months ended August 31, a monthly average increase of $140 billion. As a point of reference, the US has received $1.53 trillion in withheld income tax over the same period, confirming that the US continues to issue more than one dollar in debt for every dollar it receives via income tax revenue. This balance will likely be tipped soon courtesy of changes to the tax law, which will adversely impact the withheld tax line, implying even more funding has to come in the form of debt.

For the 11 months ending August 30, the US has paid $180 billion in interest expense in a time of record low interest rates.

At the current rate, we expect that the statutory, and completely irrelevant, debt limit of $14.3 trillion will be breached in the first two months of 2011. At that point total federal debt as a % of US GDP will be roughly 100% in its purest definition, and the inevitable greenlighting by Congress to raise the ceiling then will means that America is fully sliding into a debt-to-GDP ratio of >1.

Other sobering thoughts:

• The $620 billion short term debt roll can disappear overnight leaving the U.S. no option other than printing money. The U.S. will have to fund another $200 billion each month thereafter in expenditures by printing money. The U.S. will have to fund another $150 billion in maturing debt each month thereafter by printing money.

• Each one percent increase in the cost of borrowing adds about $140 billion to the annual deficit. This must be funded by printing money.

• A few months ago, Greece's cost of borrowing shot up about 20 percent in one week before the EEU intervened.

• Total U.S. national income is about $800 billion.

• A rule of thumb is that a debt to GDP ratio of more than 60 percent is unmanageable.

[Moonman62]

The best hedge still exists in gold and silver,

You don't need either. Anyone with the ability to borrow money during hyperinflation can make a fortune buying almost any asset. During Germany's hyperinflation a person could buy a bottle of wine, drink it and return the empty for more money than the wine was purchased for the previous day.

[LanaTurnerOverdrive]

mark

[Toddsterpatriot]

This drives interest rates lower, making income harder to come by.

And it makes cash easier to come by.

We are copying Japan.

We are copying some of their wasteful spending, unfortunately. But are we copying their monetary policy? What has their money supply done since 1989?

[Southack]

If you measure the entire available-credit+cash equation, or just cash?

Heck, you don’t even have to go into that. Japan has had deflation since 1989. Real-estate in Tokyo is still worth half today what it brought back in 1988. Stocks on the NIKKEI are worth a pale 25% today of their value back in 1989.

Japan has tried every form of Stimulus and cash injection imaginable over the past 21 years...it’s all failed.

Japan has deflation. Not a crash, but a slow bleed that makes citizens feel the pain over decades.

The worst torture has never in History lasted for so many years on even the worst prisoners.

And we are copying Japan because every MBA kiddie in power is convinced that debt and deflation can be gamed away with the “magic” of the printing press, even though more than two decades of such efforts failing in Japan show otherwise.

Debt is cumulative. Debt is deflationary. Once debt accumulation has compiled more deflationary power than any short-term spending can overcome (even briefly), a nation is trapped in a deflationary spiral that will continue until deficit spending is gone and old debt is brought down through default or payoffs.

You can’t game debt. You can’t game deflation. The printing press isn’t magic after all.

Keep up deficit spending on desperate “Stimulus” and “bailouts” from here on out and the new debt will simply accelerate the deflation...the opposite of what every “too-smart-for-his-pants” MBA kiddie has been programmed to think and regurgitate.

[Jack Black]

My parents had a home purchased for $40,000 and a fixed interst rate mortgage of 4.5% in the 1970s. At the end of the Carter/Reagan inflation the house was worth $400,000 and they were still paying $400 a month for it.

Fixed interest rate loans on real estate are as good a defense against inflation as gold and silver - note: I am a huge PM bug (see my home page).

It is not only the super rich who will make out in this scenario, but many ordinary prudent Americans with fixed rate loans.